Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

If you’re not a retirement savings “geek” like me, you may have missed the news that the IRS increased contribution limits for IRAs this year. It’s the first increase we’ve seen since 2008. In 2013, the limits increase to $5,500 if you’re under age 50 and $6,500 if you’re 50+—an increase of $500, which is a 10% increase.

At first blush, $500 may not seem like a material increase. Certainly many, including me, would like to see higher limits to encourage greater retirement savings. But even taking full advantage of this increase can, over time, make a rather significant difference in an IRA.

To demonstrate this point, take a look at this rather simplistic example. I assume that an investor contributes $500 to her IRA this year. To keep it simple, I assume that the account earns a 4% real return. At the end of 30 years, the account grows to $1,622 (in today’s dollars). Through the power of compounding, the $500 grew to over $1,600.

Source: Vanguard.

Even though it’s a hypothetical example, it does drive home the message of compounding. I encourage you to take advantage of full IRA contributions every year, especially when made to a Roth under which earnings grow tax free. Greater savings today will enable you to reap greater financial rewards later in retirement.

Maria Bruno

Maria is a senior retirement strategist in Vanguard Investment Strategy Group. She leads a global team that's responsible for conducting research and providing thought leadership on the topics of retirement, wealth, portfolio construction, and financial planning for individual investors. Maria specializes in retirement planning, retirement income solutions, and wealth management strategies. Prior to her current role, Maria worked in our financial planning and advice departments. Maria earned a bachelor of science in business administration (B.S.B.A.) from Villanova University and is a Certified Financial Planner™ professional.

Comments

Bid S. | November 10, 2013 8:42 pm

Benit D. | November 10, 2013 1:50 pm

Larry S. | November 10, 2013 11:18 am

I am not clear on why the fees charged against my investments is not disclosed on the statements, I would think that a statement is not compleat if all transactions are not on the statement. To be clear I am talking about a IRA account .

James W. | October 24, 2013 1:30 pm

How fortunate you are to now have up to $6500 contribution to your IRAs. Before I retired in the late 90s the limit was $2000 for an individual, but only $2250 total for an individual and his/her non-working spouse. That was quite low for two persons.
Take advantage of this new limit folks….you will be grateful when you reach my age.

Nikki H. | October 25, 2013 2:39 pm

Peter D. | October 23, 2013 4:19 pm

You should consider the investment increases due to an additional $500 a year. I realize that the limits are going to increase again (and will probably continue to increase at some haphazard rate) but to consider the effect of this year’s increase over every year seems useful. For example, for the same example ($500 a year, 4% return, 30 years) I calculate that the additional $15,000 turns into $29,164 which seems like a more useful thing to know and show.

Also, as a side note, I would hope that the people at Vanguard would be using something other than excel to do their calculations.

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.